Institutional Investors Group on Climate Change responds to HLEG report

For investors committed to climate action the work being done by the EU’s High-Level Group on Sustainable Finance (HLEG) is both very welcome and cannot come too soon.

For the financial sector to respond effectively to the climate challenge the EU must signal clear direction and expectations across all economic sectors – particularly energy, transport and industry. At the same time the EU must ensure that the entire system works in a holistic way such that regulations related to energy, climate or transport policy, some aspects of financial regulation and non-regulatory reforms recommended by HLEG pull in the same direction.

There is an urgent requirement for the EU to ensure a strong and enduring carbon price

Such ambition must be backed by concrete, long-term targets and objectives as well as underpinned by a determination to increase over time the EU’s Nationally Determined Contribution to the Paris Agreement (with discussions on this starting promptly in 2018).

With all that in mind, a number of core recommendations lie at the heart of IIGCC’s response to the interim report of the EU’s High-Level Expert Group on Sustainable Finance:

Firstly, given the importance of price signals we suggest there is an urgent requirement for the EU to ensure a strong and enduring carbon price as part of the on-going negotiations on the reform of the EU Emissions Trading System. Without a meaningful price on carbon, investors will remain slow to adapt their investment towards low-carbon activities and may continue to misallocate substantial capital towards activities that continue to emit greenhouse gases – something that will harm the ability of the EU and its Member States to ratchet up their ambition under the Paris Agreement.

In addition, the EU must put in place a robust long-term policy framework where targets to 2050 consistent with the Paris Agreement are built in to the Clean Energy Package legislation, including measures relating to Governance of the Energy Union, Energy Efficiency, Renewables, and the Energy Performance of Buildings.
And critically, as IIGCC highlighted in a letter sent this week to policymakers in the Commission, Member States and the Parliament, the EU must set long-term targets for the transport sector that are strong enough to stimulate swift decarbonisation through both electrification and the use of alternative fuels.
Secondly, robust disclosure has a critical role to play in enabling financial markets to price risk correctly and ensure improved assessment and integration of risk and opportunities of climate change by companies and investors. We suggest the EU must strongly encourage the full implementation of the recommendations made by the G20 Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).

To that end the EU could, for example, monitor and evaluate the impact and effectiveness of the French Energy Transition Article 173 and other national instruments. It should seek to position itself as a global leader on the issue of disclosure, fostering and sharing best practice to enable the future development of possible guidance or legislation.

Thirdly, we argue it’s vital the EU drives a discussion with a view to providing full legal clarification that the currently fragmented ‘prudent person rule’ – the EU concept equivalent to that of fiduciary duty – allows for the consideration of environmental, social and governance factors by encompassing all financially material sustainability issues. Likewise, the EU should encourage the OECD to strengthen the current G20-OECD High-level Principles of Long-term Investment Financing by Institutional Investors and must seek to encourage Member States to review their fiduciary duty rules (as each country currently employs a different approach).

Fourthly, we agree that the EU has a powerful role to play in a number of other areas. For example, it can help to encourage all the major Credit Ratings Agencies fully incorporate sustainability and long-term risks into their ratings frameworks. It could also consider further research into how the incentives given to fund managers might cease to be framed only in reference to high-level performance over short-term horizons, to become better aligned with the goal of driving investment to deliver lasting sustainability over the longer term.

[The Commission] can help to encourage all the major Credit Ratings Agencies fully incorporate sustainability and long-term risks into their ratings frameworks

The Commission could also continue work to develop a classification system for sustainable assets and financial products.

We stress that it’s vital the EU ensures all the work undertaken to establish new EU norms, rules and practices is pursued in consultation with established experts, reflects global perspectives, and builds upon existing best practice. With so much expertise and activity concentrated in just a handful of countries, we also suggest the EU must do more to bridge the gaps this creates within the European financial system, not least through the provision of more information, better resources, and additional training.
The EU’s High-Level Group on Sustainable Finance has a real opportunity to ensure a smoother and more efficient transition to a low-carbon economy if it focuses on the need for an integrated approach between climate and energy policy (and particularly robust carbon pricing) and the wider range of potential reforms currently under review.
To see the IIGCC’s position paper, click here.

Stephanie Pfeifer is the CEO of the Institutional Investors Group on Climate Change